General Electric's (NYSE:GE) litany of problems has been discussed ad nauseam in the past couple of years, as it lost three-quarters of its market cap. Can newish CEO Larry Culp get the fading giant back on track?
In this segment of the Market Foolery podcast, host Chris Hill and MFAM Funds' Bill Barker discuss GE's most recent quarterly report, which featured an improving cash-burn rate -- a hopeful sign. They also consider Culp's guidance for the year, where the bottom is (or was) for this decline, and GE's path to profitability.
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This video was recorded on April 30, 2019.
Chris Hill: Let's move on to General Electric, which is still burning cash, although they burned less of it in the first quarter.
Bill Barker: That's a victory lap right there.
Hill: [laughs] That, as much as anything, is probably why shares of GE are up 4%.
Barker: "You thought we were going to burn all the cash this quarter. We only burned $1.8 billion of it, or $1.2 billion if you squint your eyes and look at it from our adjusted perspective. It's not really the full $1.8." Yeah, and that qualifies as good news. This is a very different story than Google, where the perspective coming into any earnings report is, just how good is this going to be? Google's like, "Well, we grew about 20%." And everybody says, "Oh, my God, what is wrong with you?" This is where a one-day move in stock price is more dependent on what the expectations were than what the delivery was. And GE's up, despite losing a couple of billion.
Hill: I also think that Larry Culp, the CEO, the guidance that he gave...I use the word "guidance," I could have just as well used the word "reassurance," the reassurance that he gave regarding the rest of the fiscal year. I think, to go back to what you were saying, in terms of, what is the story going into any company's quarter? I think one of the stories, at least with General Electric, is, are we at the bottom? I think there are absolutely analysts on Wall Street who look at the size of General Electric, the history of the company, and say, "OK, look, it's not going to zero, so what do we think the bottom is?" Was the bottom $8 a share, like it was a few months ago? The stock's up 4%. Over the last four months, it's up about 25%. I think that kind of reassurance from the CEO, if it doesn't get investors excited about GE, it at least moves GE out of the critical care unit and into...I don't know the name, the wing of the hospital where they put serious patients.
Barker: Yeah. So, is it the bottom? Well, it depends on how you define what the bottom is.
Hill: Don't we all define the bottom as zero?
Barker: You're talking about the stock price. I'm talking about the cash burn now. The indication is that Q1 is going to be the low point of the year, at least for cash flow. So the rest of the year will have better cash flow or cash burn. So in one sense, that's the bottom. We're not going to lose money as fast as we are right now, again, for the rest of the year. On the other hand, you might say, the bottom is when you're not losing money; when you stop losing money, I'll call that the bottom. And we haven't quite gotten reassurance on that yet. So it's not going to depart a whole lot, I think, from this level as a stock until there's guidance that says, "Here's how much money we're going to be making doing the business we're doing today." That's what you want to invest in, companies that make money.
Hill: [laughs] Right.
Barker: Investing 101.
Hill: Or at least have a promise of it at some point in the future. There are certainly plenty of successful stocks --
Barker: Currently profitless companies which are very valuable, but that is because there is either a path or a belief that there is a path. Something like Uber will get more and more attention, I think, about whether there is a path or simply a belief that there's a path to profitability there. But it's going to be an incredibly richly valued company when it comes to public.
Hill: Like all private companies, when they go public, they will absolutely get more attention. As we've learned over time, some of those private companies regret going public because they don't like the scrutiny.